ITAT Reduces Ad-hoc Expenses Addition to 10% of Turnover, Earlier Estimates Held High [Read Order]
The appeal challenging alleged ex parte disposal by CIT(A) was dismissed, as the assessee had been given adequate opportunity to submit its case. The ruling emphasises the need for proper documentation to substantiate business expenditures
Ad-hoc Expenses
Ad-hoc Expenses
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) partly allowed the appeal of a partnership firm for AY 2017-18 by reducing the ad-hoc disallowance of expenses from 15% to 10% of turnover. The Tribunal held that while the AO and CIT(A) were justified in estimating expenses due to a lack of documentary evidence, their higher disallowances were excessive.
The present appeal related to the assessment year 2017-18 and arises from the order passed by CIT(A), National Faceless Appeal Centre, Delhi, dated 07.06.2024. The assessee, Headstrong Ventures, a partnership firm, had not filed its income tax return for the year under consideration.
Based on information received from the Department’s NMS portal, the assessee was identified as having received aggregate receipts of Rs. 1,18,05,785 from various parties towards commission, brokerage, fees for professional or technical services, and contractual receipts.
A notice under Section 148 of the Income Tax Act, 1961, was issued on 30.03.2021. The assessee filed its return belatedly on 15.03.2022, declaring a total income of Rs. 24,110. Notices under Section 142(1) were issued subsequently, but the assessee did not respond.
Thereafter, a show-cause notice was issued on 07.03.2022. In response, the assessee submitted certain documents, including bank statements, computation of income, audited balance sheet, and Form 26AS.
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However, it did not furnish a tax audit report, profit and loss account, and other vital documents to substantiate claimed expenses. In view of this, the AO made an ad-hoc disallowance of 25% of aggregate expenses amounting to Rs. 30,45,150 under Section 144 of the Act.
On appeal, the CIT(A) restricted the disallowance to 15% of turnover, considering the submissions made by the assessee. Dissatisfied, the assessee approached the Tribunal, also contending that the CIT(A) had passed the order ex parte without giving adequate opportunity of hearing.
The single bench of Vikas Awasthy (Judicial Member) examined the matter and found that the CIT(A) had issued a notice on 15.03.2024, to which the assessee responded on 31.03.2024. The CIT(A) had considered the submissions and granted partial relief. Accordingly, the allegation of ex-parte disposal was dismissed.
Regarding the ad-hoc disallowance, the Tribunal observed that since the assessee failed to produce relevant documents to substantiate claimed expenses, some estimation by the AO/CIT(A) was justified.
However, the AO’s disallowance of 25% and CIT(A)’s 15% were on the higher side. Considering the turnover and nature of the business, the Tribunal held that restricting the disallowance to 10% of turnover would be fair and reasonable.
The tribunal partly allowed the appeal by reducing the ad-hoc disallowance to 10% of turnover while upholding the validity of the estimation under Section 144.
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